Sinking the Dodd-Frank ship

The "sequester" has taken effect. According to multiple news reports, an early casualty will be the shipbuilding industry, especially on the military side. But it will also make more difficult the full implementation of the derivatives piece of the Dodd-Frank Act by the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) that are already struggling to complete the task.

That our national lawmaking process has collapsed should be obvious to all. I have long advocated that every ballot should contain a "None of the above" box. Unfortunately, the idea has not taken hold, but, if it did, we would be largely spared the cost of transporting our "leaders" between their exotic destinations and an occasional appearance in the Nation's Capitol, not to mention the many impassioned speeches made by our legislators for TV consumption to an empty House or Senate.

This is not the ranting of a committed Democrat or Republican. I was only one of two CFTC Commissioners ever confirmed as an Independent, over some angst at the Reagan White House and suspicions in the Senate that I was a closet Republican. Even then, when the Government seemed to work moderately well, I wanted no label attached to me.

But back to the CFTC and the SEC. Consistently, both have delivered to the Treasury an amount of annual civil penalties well in excess of their budgets. Sometimes, a single settlement exceeds that amount. Each agency is a cash cow in the federal budget. Even so, the sequester restraints are likely to slow that source of windfall profits and exacerbate, not reduce, the national deficit. Go figure.

Dodd-Frank is a major expense to both regulators. For those who oppose some or all of its mandates, the sequester is good news. It will almost surely slow the process of putting the new rules into effect and provide more time to deflate or deflect some of the new requirements.

Meanwhile, the futures markets have begun to create new futures contracts around other derivatives, like swaps, that will (and should be) administered under the pre-existing regulatory scheme for futures that has been in place for generations. This reflects a fact missed by the Congress — that swaps are virtually indistinguishable from either futures or options, economically speaking, that were already covered by the Commodity Exchange Act (including the exemptive powers for the more byzantine instruments). Indeed, although the CFTC had allowed private swaps under strict conditions for a number of years, it never said that they were NOT futures or options.

Of course, dysfunction is the dominant gene in the Government's anatomy these days. Sequester assures that the CFTC and SEC will contract that same malady. Opponents of Dodd-Frank will surely make much of the resulting chaos to undermine confidence in the agencies. Like cutting off a person's foot and then criticizing the limp.